Staggered Price Setting, Bertrand Competition and Optimal Monetary Policy

Federico Etro () and Lorenza Rossi

No 2014:10, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: We reconsider the New Keynesian model with staggered price setting when each market is characterized by a small number of firms competing in prices � la Bertrand rather than a continuum of isolated monopolists. Price adjusters change their prices less when there are more firms that do not adjust, creating a natural and strong form of real rigidity. In a DSGE model with Calvo pricing this reduces the level of nominal rigidities needed to generate high reactions of output to monetary shocks. As a consequence, the determinacy region enlarges and the optimal monetary rule under cost push shocks, derived with the linear quadratic approach, becomes less aggressive, and the welfare gains from commitment to the optimal monetary policy decrease.

Keywords: New Keynesian Phillips Curve; Real rigidities; Sticky prices; Optimal monetary policy; Inflation; Endogenous entry (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2014
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Working Paper: Staggered Price Setting, Bertrand Competition and Optimal Monetary Policy (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ven:wpaper:2014:10

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